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ECONOMY | 14-03-2020 08:48

Coronavirus casts another shadow over Argentina’s economy

Consultancy firms predict outbreak will deepen economic turmoil in 2020, shaving as much as 0.5% off GDP

As the Alberto Fernández administration struggles to get to grips with the expansion of the coronavirus in the country, analysts are raising the alarm over the potential impact that the virus is already having on the economy.

Experts warn that Argentina now has almost no chance of reactivating its economy this year due to anticipated lower levels of exports and consumption.

Consultancy firms consulted by the Times estimate the outbreak could shave an extra 0.3 to 0.5 percent off GDP this year, an extra hit on previous estimates that Argentina’s economy would contract by 1.5 percent in 2020.

The news arrives with awful timing for the government, as it seeks to restructure its debt burden and with the country highly exposed to volatility.

The Ecolatina consultancy firm estimates an economic drop of two percent this year, worsening its previous prediction in line with similar calculations by other economic specialists.

However, the fact that Argentina is still a closed economy in many ways, with a reduced level of exports, could help ease the burden, analysts agree.

‘BIG EFFECT’

The biggest contraction in economic terms will come as a result of lower exports, both in terms of prices and quantities.

In January, beef exports dropped 32.8 percent compared to the average of the last quarter of 2019. Fewer sales to China mainly explain the decline, according to CICCRA beef trade chamber.

“The main direct effect of coronavirus is manifested in the price and export of agricultural raw materials, such as soybeans and, above all, meats,” the Abeceb consultancy said in a report. “China is Argentina’s second market so fewer sales from there would have a big effect on our economy.”

Abeceb estimates exports will drop five percent as an effect of the coronavirus overall, totalling approximately US$3.4 billion. The main affected sectors will be agroindustry, vehicles, oil, tourism and electronics, the firm said.

The price of commodities such as soy and maize is already slumping as part of the effect of the coronavirus outbreak in markets worldwide and that’s bad news for Argentina, which needs US dollars coming into the country, Soledad Pérez Duhalde, Abeceb’s operation chief, said. This also puts pressure on the exchange rate, she added.

That’s also the case for crude oil, which is decreasing in value, now standing at about US$33 per barrel at the time of writing. This will have an impact on the development of the enormous Vaca Muerta shale gas and oil reservoir in Patagonia. The government was counting on investment in the sector to boost growth, but officials may not have to sit it out and wait for the scenario to play out.

Amid the global financial chaos, several currencies in the region, such as the real and the Chilean peso, have been devalued too, including the Argentine peso. Nevertheless, due to the exchange rate controls in place and the intervention of the Central Bank, led by Governor Miguel Ángel Pesce, the exchange rate rose only 18 cents this week.

A slide in the exchange rate has an impact on inflation due to dollarised costs and imported inputs. But in addition, there may be “preventive” price hikes on the assumption that there could be shortages of some goods, with trade is limited due to the coronavirus outbreak.

However, there may be a temporary boost for retailers and supermarkets, which may see a boost in the short term as sales from shoppers panic-buying clears shelves.

DELAYED DEBT TALKS

The largest area of concern for the Fernández administration is probably the delay that the Covid-19 pandemic could have on its crucial debt renegotiation talks. In total, government is seeking to renegotiate US$195 billion out of a total debt of US$311 billion, including its record US$44-billion credit-line from the International Monetary Fund.

Argentina’s immediate economic future – and its ability to bounce back to growth – largely depends on the resolution of this issue, so if a settlement is delayed, the country as a whole will suffer.

Creditors want to know what Argentina’s payment capacity will be – a situation that today is difficult to define in the current scenario of global and local uncertainty.

“Lower global economic activity will affect the region and the industry will have a poorer performance. But the most important question is what will happen with the debt restructuring. The whole process will be likely delayed and that’s another reason for a larger economic drop,” Miguel Zielonka, an economist with the Econviews consultancy firm, told the Times.

Matías Rajnerman, Ecolatina’s chief economist, said all investment decisions in the country now depended on the outcome of the debt renegotiation. A delayed resolution would be bad news for the economy as a whole and for specific sectors and projects, such as Vaca Muerta, he added.

Dismissing rumours in the local press, the IMF – which granted the Mauricio Macri administration US$56 billion in credit back in June 2018 – said the Fernández administration had not asked for extra funding to deal with the impacts of coronavirus.

“The Argentine authorities didn’t maintain contact with us to request a loan. Negotiations for what is owed to the IMF continue to be constructive, as we had already characterised them,” IMF Spokesman Gerry Rice said on Wednesday.

The IMF official warned, however, that the spread of Covid-19 would complicate life everywhere – including Argentina.

“The coronavirus will have a significant impact on the global economy and countries like Argentina aren’t immune to this.”

Fermin Koop

Fermin Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires.

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